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Create a Variable Compensation Plan

Guide the design and administration of variable compensation programs with a comprehensive variable compensation plan.

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Contributors

  • McLean & Company conducted an extensive HR benchmarking survey, which captured responses on candidate sourcing strategies and trends from over 500 HR and IT professionals, between June 2011 and present day.
  • McLean & Company conducted a variable compensation planning survey that captured responses on current practices and trends from approximately 42 HR and IT professionals in October 2012.
  • McLean & Company conducted four interviews with thought leaders and HR practitioners between October and November 2012.

Your Challenge

  • Organizations need to avoid unaffordable outlays in turbulent times, yet incentivize behaviors that lead to increased profitability. Striking the right balance between cost control and ongoing competitiveness is difficult.
  • There are so many variables that affect the suitability of variable compensation plans that it’s difficult to know what effect each should have on plan selection and design.
  • Without a variable compensation policy to steer their decisions, organizational leaders often make unguided compensation decisions which can lead to real or perceived inequity. This can lead to a variety of negative outcomes, including lower productivity due to disengagement and even costly lawsuits.

Our Advice

Critical Insight

  • Business strategy, business lifecycle, culture, industry, workforce composition and demographics, laws and regulations, organizational suitability, and employee segment suitability should all be taken into consideration when selecting and designing plans.
  • Having payout floors and ceilings is acceptable, as long as 95% of performance outcomes fall within the normal range; otherwise, they can act as strong incentives for employees to act in ways that strip business value (i.e. “gaming”).
  • Budgets/targets should never be linked to compensation and/or non-monetary rewards (e.g. promotions, public accolades) because it creates a strong incentive for employees to set artificially low targets (i.e. “sandbagging”) and/or lie about their actions or performance. Either way, corporate value is eroded.
  • All payout designs (linear, stepped, and curvilinear) are appropriate for all employee segments under different circumstances, with the notable exception of executives. Executives should always be on a linear payout scheme because the incentive for gaming is high on stepped and curvilinear plans.

Impact and Result

  • Develop a clearly-articulated variable compensation plan that accurately reflects the organization’s true approach to compensation decision-making and practice.

Research & Tools

1. Engage in variable compensation planning

Establish variable compensation rules to attract and retain employees and control costs.

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Search Code: 56816
Published: November 22, 2012
Last Revised: November 22, 2012